Divine buys stock from top shareholder in option deal

August 17, 2002|By Barbara Rose, Tribune staff reporter.

Divine Inc.'s biggest shareholder sold about one-third of his holdings to Divine shareholders two months ago at $13.25 per share--well above the fair-market price at the time--under an agreement negotiated when Divine bought his publicly traded software company last year.

Former eShare Communications Inc. Chief Executive Aleksander Szlam, now an officer at Divine, exercised "put" options in June to sell 455,520 of his Divine shares back to the company for $6.24 million, according to Divine's recent quarterly report with the Securities and Exchange Commission.

Divine's stock, which closed Friday at $2.76, traded between $2.87 and $5.21 during June.

Szlam's options were a way for the former CEO, whose partnership owned 49 percent of eShare, to hedge against a drop in Divine's stock price. A put option gives the holder the right to sell at a designated price during a designated period.

Szlam's agreement--disclosed last year when shareholders of both companies approved the buyout--allowed him to begin exercising his options as early as December and to sell the remainder within 12 months starting in April.

Divine, in turn, had "call" options to buy Szlam's shares on favorable terms to Divine if the company's stock price had risen instead of fallen.

Divine's shares plummeted 57 percent, from $34 to $14.50 on a split-adjusted basis, from the time the eShare buyout was announced in July 2001 to when shareholders approved the deal last October. Since the buyout's approval Oct. 19, they've fallen an additional 81 percent.

Divine's payment to Szlam--a longtime associate of Divine founder and CEO Andrew "Flip" Filipowski--comes at a time when the Chicago-based software and services firm can ill afford the cash outlay.

Divine spent $24.9 million more on operations than it took in during the second quarter, reducing its cash on hand to $55.1 million as of June 30, including $22.9 million in cash infusions in May and June from private equity firm Oak Investment Partners.

A pending merger with Internet consultancy Viant Corp. is expected to bring in about $20 million from Viant's treasury, and Oak has a pending agreement to provide Divine an additional $38 million.

Divine originally expected to break even by June, but the software industry's continuing slump in sales coupled with costs associated with Divine's acquisition spree last year have produced more red ink.

Divine reported a $50.3 million operating loss in the second quarter on revenue of $163.6 million.

"The biggest challenge we have is to get customers to commit," Chief Financial Officer Michael Cullinane said Friday. "

The former eShare is among Divine's bigger revenue generators. The firm, based in Norcross, Ga., specializes in customer relationship software including systems that operate call centers.

Before Szlam exercised his put options in June, he owned about 1.4 million Divine shares, split-adjusted, or 7.6 percent of the company--about twice the holdings of Filipowski, who owns 3.7 percent, according to Divine's proxy report in April.

Szlam, a chief strategy officer, couldn't be reached Friday at his office in Georgia.

Szlam and Filipowski served on one another's boards at eShare and at Divine's predecessor, Divine Interventures, where they sat on one another's compensation committees. Such relationships, while not uncommon, are frowned on by shareholder advocates.